BAILEY v. COMMISSIONER OF INTERNAL REVENUE
T.C. Memo. 2012-96
United States Tax Court.
Filed April 2, 2012.
Having thus paid off the Credit Suisse loans, Mr. Bailey then had to account to the District Court for (and make up the balance of) the $2,400,855 in proceeds of his sales of 202,000 shares in 1994 and 1995. "The district court determined that Bailey incurred $1,221,177.0611 in legitimate, reimbursable expenses," Bailey I, 175 F.3d at 968, apparently leaving $1,179,678 that the court ordered him to repay. Of that amount, $700,000 was repaid in April 1997. That $700,000 payment was from an amount due to Mr. Bailey in unrelated litigation he had against Aaron J. Broder. Pursuant to court order, Mr. Broder paid that amount to trustees who had been appointed by the District Court in the Duboc case, toward Mr. Bailey's obligations in that case. In 1998 the remainder of the Broder lawsuit was settled for $1,100,000 (in addition to the $700,000 paid in 1997); however, $829,639.01 of that $1,100,000 in settlement payments from Mr. Broder was paid not to Mr. Bailey himself but to third parties.12 Specifically, $150,000 of the $829,639.01 was paid to Mr. Bailey's attorneys for legal fees, which the Commissioner concedes is deductible under section 162, and the remaining $679,639.01 was paid to Mr. Bailey's creditors, who had lent to Mr. Bailey in April 1996 to enable him to pay off the Credit Suisse loans and obtain release of the 236,000 shares of Biochem Pharma stock. Mr. Bailey did not include, in the income he reported on his tax returns, the payments totaling $1,650,00013 that Mr. Broder made to him or to his creditors on his behalf in 1997 and 1998.
The $700,000 payment from Mr. Broder in April 1997 left a balance of $479,678 of disapproved expenditures that Mr. Bailey was required to repay. Two and a half years later, the unpaid balance was only $423,237.77, so that the difference—$56,440—was evidently paid sometime before then. Since the record does not show exactly when, and Mr. Bailey has the burden of proof, we assume that a $56,440 payment was made in 1999 and not earlier. Mr. Bailey repaid the remaining balance of $423,237.77 by two additional payments in late 1999.
As a result of his handling of the Duboc matter and the Biochem Pharma stock, Mr. Bailey was disbarred.14
Notwithstanding the District Court's orders, Mr. Bailey still claimed that he was entitled to the Biochem Pharma stock appreciation that had occurred after April 1994, but in Bailey II the Court of Federal Claims rejected that claim. As a result, Mr. Bailey was left with none of the proceeds of the Biochem Pharma stock. He was reimbursed only for the portion of his out-of-pocket expenditures that the District Court approved, and he was not paid any fee for his services.
Nonetheless, the IRS issued a notice of deficiency on November 6, 2007, in which it determined, inter alia, that Mr. Bailey received income of $5.9 million when the Biochem Pharma stock was transferred in 1994 to Mr. Bailey's Credit Suisse account.